Judge blocks Apple’s proxy vote over preferred stock

Judge Sullivan said Apple is acting "impermissibly" with its proposal.

Greenlight Capital fund manager David Einhorn has won an injunction that will block an upcoming vote on one of Apple's shareholder proposals, meaning the vote is unlikely to take place as scheduled on February 27. US District Judge Richard Sullivan ruled on Friday that Apple's proposal "impermissibly bundles 'separate matters' for shareholder consideration," according to the Wall Street Journal.

Einhorn filed suit against Apple earlier this month, accusing Apple of trying to eliminate an option for preferred stock and allegedly hoarding cash instead of returning it to shareholders. Apple was quick to issue a response, saying (in part): "As a part of our efforts to further enhance corporate governance and serve our shareholders’ best interests, Proposal #2 in our proxy includes some recommended changes to our articles of incorporation. These changes were recommended independently of Greenlight’s proposal and would not preclude Apple from adopting their concept. Contrary to Greenlight’s statements, adoption of Proposal #2 would not prevent the issuance of preferred stock."

In essence, Apple argued that its proposal to roll multiple issues into one vote doesn't mean Apple won't issue preferred stock. Still, the situation has received some attention since the lawsuit popped up, and Judge Sullivan said Apple's argument was "unavailing" on Friday, agreeing to block the vote scheduled to take place next week.

If you dig into the underlying issue a lot this is about tax evasion. Much of the money Einhorn claims Apple is hoarding is held in subsidiaries abroad. It could repatriate that money, and pay it out as dividends, but it would have to pay taxes on it first. Instead of pressuring Apple to do that Einhorn wants them to engage in an elaborate scheme with preferred stock and dividends, in the hopes that Congress will some day have another amnesty for that money.

If you dig into the underlying issue a lot this is about tax evasion. Much of the money Einhorn claims Apple is hoarding is held in subsidiaries abroad. It could repatriate that money, and pay it out as dividends, but it would have to pay taxes on it first. Instead of pressuring Apple to do that Einhorn wants them to engage in an elaborate scheme with preferred stock and dividends, in the hopes that Congress will some day have another amnesty for that money.

Are you sure Einhorn is talking about money held abroad? See the excerpts below.

Basically if I read and intrepreted it right the perpetual iPref shares that Einhorn wants Apple to issue using money domestically in the US could become high quality instruments like US treasuries. Basically Apple, Inc. would be like it's own country that pays a perpetual dividend out to it's citizens (aka iPref holders).

Einhorn thinks "it could fund it through the existing domestic cash balance and future cash flow without ever depleting the cash balance." This is a very interesting idea, although IMO it is a bit like creating a welfare state where you have to continue paying the perpetual dividends. It will pay out part of the cash horde and an on-going part of cash flow for as long as the iPrefs shares exist.

Regardless of Einhorn's scheme Apple, Inc. cannot arbitrarily hold large sums of money in the US without good purpose. Otherwise the IRS can subject Apple, Inc. to a 35% tax on the "excess" holdings, whatever amount this is determined to be. Moicrosoft paid a one time dividend because of their excess cash in the past due to IRS pressure. See: http://www.nytimes.com/2004/07/21/techn ... wanted=all

"While iPref distribution combined with existing dividend would exceed existing cash flows, we think it could fund it through the existing domestic cash balance and future cash flow without ever depleting the cash balance."

"Einhorn said Apple should use $47 billion in cash to issue preferred stock with a quarterly dividend of 50 cents in perpetuity. The stock would be in high demand, he said, because "savers across the country" are in desperate need of yield."

"It has a base value of $50 and pays a dividend of $2 per year," he said. "Apple can redeem them for face value, but shareholders should not anticipate getting the face value. They should expect to receive 50 cents per quarter, every quarter, forever."

"Einhorn believes iPrefs should trade at an 80-basis-point spread to 30-year Treasuries. "Over time, the iPrefs should be highly liquid. We expect the market to accept the iPrefs as a premium quality instruments.""

"Overall, iPref's could yield 4 percent, and to receive that "from someone who can't fail is quite exciting," Einhorn added."

David Einhorn is not allowed to vote, speak about, or own stock in the Company.

Why?

David Einhorn has an interesting idea with his iPref issue by Apple, Inc. that pays a perpetual dividend. If Apple is not using the excess money then something needs to be done. In the US companies cannot arbitrarily hold large sums of cash and Microsoft was forced to pay a large dividend in 2004 - see: http://www.nytimes.com/2004/07/21/techn ... wanted=all

Personally if I was on the Board of Apple, Inc. I would not vote in the near term for the iPref issue. I would want to explore how that money could be strategically reinvested into Apple. It could be that Apple is just generating too much free cash flow and reinvesting it into the company could cause many problems as the company tries to grow into areas outside it's traditional areas of expertise. If that were the case then the iPrefs and other ideas should be seriously considered. However I think that Apple, Inc. should look to reinvesting the money first. They are already paying a dividend to common stock holders.

If you dig into the underlying issue a lot this is about tax evasion. Much of the money Einhorn claims Apple is hoarding is held in subsidiaries abroad. It could repatriate that money, and pay it out as dividends, but it would have to pay taxes on it first. Instead of pressuring Apple to do that Einhorn wants them to engage in an elaborate scheme with preferred stock and dividends, in the hopes that Congress will some day have another amnesty for that money.

Are you sure Einhorn is talking about money held abroad? See the excerpts below.

The problem is that even if Apple wanted to return all its cash to shareholders, it can’t. Much of the cash is held abroad in foreign subsidiaries. If the company repatriates it to return to shareholders, it would have to pay taxes on it. Instead, the company is letting the cash sit there in the apparent expectation that there will be federal tax relief.

It’s here that Mr. Einhorn enters the picture. He has been buying Apple shares for a few years, and his fund owns more than 1.3 million shares. The hedge fund magnate wants Apple’s stock to earn a higher multiple by dealing with the cash problem.

But Mr. Einhorn is also impatient and unwilling to wait for federal tax relief. Instead, he has a clever idea. At an investment conference last May, Mr. Einhorn proposed that Apple issue $500 billion of perpetual preferred stock free to all shareholders. The preferred stock would yield 4 percent and be freely tradable.

Quote:

Basically if I read and interpreted it right the perpetual iPref shares that Einhorn wants Apple to issue using money domestically in the US could become high quality instruments like US treasuries. Basically Apple, Inc. would be like it's own country that pays a perpetual dividend out to it's citizens (aka iPref holders).

I can't figure out the advantage to issuing preferred stock to existing shareholders, as opposed to simply increasing the dividend on common stock. (And SELLING preferred stock would just make things worse, as it would add to the cash pile!) I know preferred stock's treated differently for tax purposes, but damned if I can remember how.